Originally published here.
June 15, 2016—After May’s dismal jobs report, the odds of the Federal Reserve raising the target federal funds rate anytime soon are just about nil.
Remember that the Fed has declared itself for the past several years to be “data dependent”, meaning that they are looking for good economic news and data that indicates that the economy has gotten back to normal. And what do they mean by “good news” or “back to normal”? Why, the overheated boom-period growth rates we last saw at the height of the last housing bubble. That is why the Fed will not be raising rates for a long time.
The malinvested resources from the early-2000s dot-com bubble and from the mid- to late-2000s housing bubble were never allowed to liquidate. The Fed merely papered over those crises with more easy money, ensuring that the subsequent bubbles were blown larger and larger. Rather than allowing prices to fall, the Fed tried to prop up prices in the mistaken belief that high prices equate to wealth and prosperity. What we are seeing now is an economy that desperately wants to see prices fall, to see bad debts liquidate, to see malinvested resources put to more productive use. The Fed is doing everything it can to prevent that from happening, engaging in quantitative easing and near-zero interest rates to push more money into the economy and keep prices up. We’re seeing a stalemate, with market forces trying to push prices lower and the Fed’s easy monetary policy trying to counteract those forces and push prices higher. That is why most economic data ranges from middling to disappointing. And if the Fed is waiting for data similar to that from 2004-2006 before it raises rates, it will be waiting for a long time.
There are two ways to get back to more impressive growth rates and better unemployment rates. The first would be for the Fed to engage in more quantitative easing, maybe negative interest rates, or helicopter money (injecting money into the economy outside the banking sector.) It would have to be a massive effort, dwarfing what it has done until now, but even then it might fail. But one thing is guaranteed, the effects of that monetary easing would be a short-term burst of economic growth but a subsequently larger bubble and consequently larger bust resulting in a serious recession or depression.
The second way to get back to better growth rates would be for the Fed to take its hands off the levers of the economy, to stop trying to influence GDP growth and employment. Bad debts would have to be written off, inefficient and insolvent firms would go under, and there would undoubtedly be some discomfort as the economy returns to normal. But in the mid- to long-term the economy would end up far better off. There might or might not be any headline-grabbing growth numbers, but growth would at least be steady and consistent, without the booms and busts precipitated by the Fed’s easy monetary policy and the uncertainty brought about by the prospect of monetary policy changes every six weeks.
Solid, consistent growth isn’t sexy, it doesn’t pay for advertising on financial news shows, but it leaves everyone much better off.
Don’t expect the Fed to acknowledge that, of course. Now that we saw the same old, same old at today’s FOMC press conference, with the Fed keeping rates at between 0.25 and 0.50 percent, we can expect to hear them renew their intent to hike rates only once they see data that will never come.
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